How to Start a 501(c)(3) Nonprofit
A nonprofit organization is essentially a business for which making a profit is not a primary goal. Nonprofits can make profits, but they must be redistributed back into the organization. A nonprofit organization may be created as a corporation, a trust or an unincorporated association.
Section 501(c)(3) of the Internal Revenue Service code is the most common federal tax exemption for nonprofit organizations, although there are 25 other sections to which an organization may apply. Section 501(c)(3) exempts organizations from taxes on income directly related to the organization's mission. The public good is at the heart of what a 501(c)(3) organization does, so the IRS code places important governance and accountability structures to ensure good stewardship of the resources. Starting a tax-exempt nonprofit organization needs to begin with careful deliberation and an understanding of the rules of engagement.
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Instructions
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Research the statistics that prove there is a need for the nonprofit that you want to start. There were 1.2 million charitable organizations registered in the United States by 2009. Many of them were duplications of each other, seeking donations and contributions from the same foundations, corporations and individual donors. As a result, this makes competition fierce. Figure out how you will differentiate your nonprofit and what unique things your team brings to the solution. Also, consider forces joining forces with an existing nonprofit before beginning a new one.
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Take care of registration matters. Starting a nonprofit in most states is similar to starting any incorporated organization in your state. Choose a business name and create articles of incorporation, sometimes called a charter, and file them with the appropriate agency in your state---typically your secretary of state, business agency or tax assessment agency. Also file for a Federal Employer Identification Number, or EIN, to conduct transactions, such as banking, as a new incorporated entity.
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Set up a board of directors that must maintain a professional-only relationship with the organization and will not receive income from it. Draft your organization's bylaws. These rules and procedures are spelled out to cover the rules of conduct of the organization and give authority to your board of directors and other officers. Convene an organizational meeting once your legal papers are in order and governing documents for your organization are complete. This first official meeting is for all officers named in the articles of incorporation and to officially begin the work of the organization.
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File for tax-exempt status as a 501(c)(3) organization under the IRS code. The fee for this application ranges from $300 to $750 depending on your organization's operating budget. Consider a nonprofit consultant or an attorney to assist with this process. Although it can be done without help, it often takes up to three months and involves volumes of paperwork. Your organization will have to be classified according to the approved purposes listed in the tax code. Most charitable organizations operating under tax-exempt status qualify as educational organizations. Once approved you will receive a determination letter from the IRS, allowing you to begin operating on a tax-exempt basis.
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Raise funds. Additional rules apply to how you can solicit charitable donations, so be sure to check with your state office of the National Association of State Charity Officials. Approach foundations, corporations, major donors and the community to support your organization for your programs and activities.
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Tips & Warnings
File the IRS 990 form each year, even if your organization is not required to do so. Post it on your website to maintain transparency in your organization. Doing so establishes trust, builds your reputation, helps you gain clients, and assists with fundraising.
Starting a nonprofit is a serious endeavor. The tax-exempt status is a form of public trust. Many use nonprofit statuses to further their own personal agendas. You must report your organization's workings and finances to the IRS, which has strict rules about what constitutes fraud and conflicts of interest. Don't jeopardize your tax-exempt status by starting a nonprofit for anything but honorable purposes.
References
- IRS: Life Cycle of a Public Charity - Starting Out
- IRS: Exemption Requirements - Section 501(c)(3) Organizations
- Business: Non Profit
- Center for Nonprofit Advancement: How to Start a Nonprofit
- Philanthropy: Number of Charities and Foundations Passes 1.2 Million
- LaPiana: Tool for Assessing Startup Organizations
Resources
- Photo Credit Jupiterimages/Comstock/Getty Images
